The much ridiculed "MLEC-type" bailout proposal of Greece, which contemplates the rolling of existing debt into a guaranteed SPV, and which was the European rescue deux ex machina for exactly two weeks, appears to have been pulled off the table, following the announcement by German Deputy Finance Minister Joerg Asmussen to Reuters Insider TV that "Germany has put a Greek bond swap back on the table as a model for private sector involvement in fresh aid for Athens." More: "The model put forward by some French banks is still a good base for discussions and we are currently working on this. But since rating agencies have signalled that they will consider modalities (such as) the French proposal as a selective default -- that means a rating event -- we can also put other options like a bond exchange on the table." he said, adding discussions would take place over the summer break. Translation: back to square minus one. And actually it is much worse, because if Asmussen is aware of rating agency policy, a debt exchange would most certainly qualify for an event of default. Which confirms our initial expectation from a month ago that there is nothing absent a complete loss of ECB credibility that can possibly transpire next, as the ECB realizes there is no way around accepting defaulted Greek bonds as collateral. The only question is what happens then: will the market, head currently deep in the sand, scramble upon the confirmation that the ECB emperor is naked, or will it continue acting as if nothing has changed yet again.

And while Asmussen is not aware of the nuances of a debt exchange, his colleague Schaeuble sure is:

Finance Minister Wolfgang Schaeuble wrote to his euro zone colleagues, the European Central Bank and International Monetary Fund last month demanding that banks holding Greek bonds swap their bonds for new ones with maturities seven years longer.

But rating agencies signalled then that such a step would be akin to a rating event and the ECB, European Commission and France pushed for a softer solution involving a voluntary debt rollover, prompting Germany not to insist on its bond swap idea.

Ergo: dead end.

More on the currently proposed rescue model:

Asmussen said the French model may set "too clear" incentives for private creditors to participate.

"The model certainly has advantages in the sense that it gives clear incentives for financial market participants to contribute voluntarily. But the question is: are the incentives maybe too generous?" he said.

Work was being done to modify the proposal, especially with a view to lowering the interest rate Greece would pay on its debt, but other options including the bond swap would also be considered.

"First, one has to look how can one modify the French proposal in a way that it is still attractive to financial institutions," Asmussen said.

"But one element one needs to look at is the interest rate that Greece has to pay because the higher the interest rate, the more negative it is for the debt sustainability situation of the country," he added.

This is all fine and great, however, as the WSJ reported yesterday there is one big problem: the private holders have already sold the bulk of their holdings.

Europe's hopes for a significant contribution by private bondholders to a new bailout for Greece are fading, as it becomes clear that banks have sold off a substantial proportion of their Greek government-bond holdings despite pledges by some of the institutions not to do so.

The problem is that the banks and insurers at the negotiating table no longer hold as much of the debt maturing through 2014 as they did a year ago. In May of last year, German banks and insurers made a nonbinding pledge to maintain about €8 billion in Greek debt and loans for three years. Yet the current Greek debt holdings of those institutions suggests they have sold some of their holdings anyway.

There isn't detailed information on how much Greek debt German and other European financial institutions may have jettisoned. Allianz SE, the German insurer, has said it holds €1.3 billion in Greek bonds, compared with €3.3 billion last year. The company has said it would be willing to roll over about €300 million under the current proposal.

So who controls the fate of Europe now? Why hedge funds of course.

Analysts said banks were likely to have sold off short-term Greek debt because it trades at a smaller discount to face value than does longer-term debt. Meanwhile, hedge funds and other investors, who are likely to have bought up the paper, are less likely to be persuaded to engage in the debt rollovers being proposed by euro-zone governments.

Funny: it was precisely a month ago that we explained why "every single Greek bond in recent weeks has been purchased by hedge
funds who have remembered that the economics of "nuisance value" when
the upside of bluffing the EUR printer is virtually unlimited."

Ah irony: prepare for a massive scapegoating campaign aimed at hedge funds any second, only a diametrically flip flopped one: this time instead of accusing hedge funds of shorting Greece and Europe by being short various sovereigns by being long CDS, hedge funds are about to get bashed in the media everywhere for being... long paper.

Sure it's a pledge. But one where if they don't keep it, there is no recourse for. I imagine that so long as they are on the winning side, they will stick to the pledge. If it loses favor for them, they can walk away.

Which hedge funds hold Greek paper? Do they have a history of acting as a nuisance to such sovereign debt roll-over plans? Are they involved in the current negotiations? What is their perspective on how the talks are going? What type of responses are they crafting for the likely outcome of these talks?

Expect this "Greece plan discussion" to continue well through July until the US debt ceiling talks divert media attention. By August, all bets are off for Greece, and we will be well on our way to contagion.

The French plan helped the banks. Now maybe they will really do something that takes a real hit and gives Greece a real chance. They may be shocked to find out that most was priced into their shares already.

Ah irony: prepare for a massive scapegoating campaign aimed at hedge funds any second, only a diametrically flip flopped one: this time instead of accusing hedge funds of shorting Greece and Europe by being short various sovereigns by being long CDS, hedge funds are about to get bashed in the media everywhere for being... long paper.

Quite so. All fiat currencies are, as an inherent part of their nature, temporary and unsustainable constructs requiring perpetual and ultimately parabolic increases in debt simply to continue to exist. Clearly this is a nonsense.

All fiat currencies are, as an inherent part of their nature, temporary and unsustainable constructs requiring perpetual and ultimately parabolic increases in debt simply to continue to exist

Hmm... this is not true.

All fiat currencies PAIRED WITH fractional reserve banking are as you describe. However, a fiat currency need not be paired to fractional reserve banking. (clearly they all are at this time). admittedly, it is unlikely that our overlords can ever use fiat without eventulaly pairing it to debt.

also: there seem to be two over-arching rules in the currency universe

rule #1: all fiat eventually goes to zero, to be replaced with either an asset-backed currency or another fiat.

The Euro will be kept floating and Greece will be in limbo until the US debt ceiling is raised and a lot of the short term US debt comes due. At such time the Euro will be allowed to implode, resulting in a 'flight to safety' where the US will be able to borrow a ton of money at below inflation. You heard it here first, now play the game accordingly.

Guys, I am telling you. These details are the equivalent of walking into a parole board meeting, being stopped at the door, and being told there is no budget to keep the criminal in jail.

You can listen closely and analyse the parole board questions and responses and obsess over the details, but the outcome is already decided, and it is that they are going to bail out Greece. It doesn't matter how or the mechanism.

They are terrified of swaps and even more conventional contatgion. They will never allow default. They will all write checks and GIFT it to Greece if that's what is required.

FOA: "My friend, debt is the very essence of fiat. As debt defaults, fiat is destroyed. This is where all these deflationists get their direction. Not seeing that hyperinflation is the process of saving debt at all costs, even buying it outright for cash. Deflation is impossible in today's dollar terms because policy will allow the printing of cash, if necessary, to cover every last bit of debt and dumping it on your front lawn! (smile) Worthless dollars, of course, but no deflation in dollar terms! (bigger smile)"

LOL hmmm lets see....theyve already tried to bail out Greece like 3 times in the last few months, last WEEKS 'bailout' already a spectacular fail, yet 'somehow, theyll bail it out'....sorry Im not buying it. 3 strikes and yer out, bitchez.

BTW forget the tiny Greece sideshow, how about the US debt crisis which has to raise a couple trillion in the next month or so? I dont care how much they may dislike defaults, fact is defaults loom no way around it.

Scary numbers aren't they? I'll bet Mr Trichet is so very glad he's retiring shortly. He's probably praying that everything holds together until he's gone so the next Guy's name goes in the history books as the ECB chief under who's watch the Euro collapsed.

So, the banks are suggesting the solutions which save them from any haircut on their own bond holdings. My view may be overly simplistic, but surely banks are amongst those investors who should be most capable of quantifying and avoiding (hedging) risks associated with bonds and other assets. Advising clients on asset allocation/exposure/risk is part of their business, but they appear to be so bad at it.... This makes no sense to me

America haters blinded by rage don't realize that we are in pretty good shape compared to europe. Our banks are leveraged 13 to 1. Top European banks are levered 30 to 1 and more overconcentrated and monopolistic than USA banks.

Levered 30 to one on greek debt that is held at full value when it trades for a 50 percent discount on the market!

The dollar will do fine. We are known as the reliable partner around the world, not the dithering europeans. Even the eastern europeans have greater confidence in the USA than the dithering western europeans. We were there for them when it counted. They know who to count on in a crises

Character, behavio,r and certainty count. The USA has it. The ECU doesn't. If the ECB buys defaulted bonds there will be hell to pay by the market.

I hope I qualify, I have to polish up my snobbery. How can I be of service? Where do you feel inferior? Eating habits? Culture? Getting laid? Quality of government? California Debt vs Greek Debt? As you wish.

I don't believe I'm having a conversation of this kind with someone that has troll in his name!

it only runs a trade surplus within the Union itself--hence the blowup of Greece, Ireland and Portugual which have massive trade deficits. Blowing up these entire nations does not mean "you get to walk away" in my view. And if it were me and i were these nations i would seriously consider dollarizing. Not least because "the barriers to entry are quite small" plus as you say "all oil is priced in dollars." As is much else of course.

They purposely DOCTORED the picture of the Abbot to make him look like a crook.

IT’S THE JEWS WHO ARE CROOKS and You HAVE THE NERVE TO ADVANCE THEIR CHRIST-HATING GARBAGE on my Site!

Go take your JEW LOVING COMMENTS somewhere else man.

I know of Vatopaidi Monastery and the Abbot there and the JEWS of Vanity Fair ARE LYING about him and his fellow priests and monks.

Vatopaidi has EVERY RIGHT to OWN THEIR **OWN** PROPERTY as do ALL THE MONASTERIES on MT Athos! IT’s AN INDEPENDENT JURISDICTION with headquarters of their OWN ADMINISTRATION on Karyes you idiot.

Of course they BAN WOMEN there…(oh! You’re SO offended by this just like the Jews!)…it’s FOR MALE MONKS ONLY and HAS BEEN FOR 1000 years you JEW-LOVING dupe! You SWALLOW JEW LIES and try to VOMIT UP THEIR LIES HERE ON MY SITE? No more. You’re gonzo!

You despise the Icons of Our Saviour and His Holy Mother and now I know why!

Because you SWALLOW JEW LIES from JEW-OWNED and JEW-JOURNALISTS of Vanity Fair Magazine and POST THEM HERE on my SITE whom you know is AGAINST JEW SMEARS and is an Orthodox Christian with many ties to the Greek Orthodox Church and its priests and Abbots.

Jews just LOVE TO SMEAR THE CHURCH and you FALL FOR IT. Don’t you DARE EVER print their JEW SMEARS here again with your “oh, I just couldn’t hold back” bs. And you WON’T! You’re gonzo…

The anti-Semitic comments are horrendous. I have heard anti-Semitic comments in connection with this crisis, and so it does not entirely surprise me. One never hears anti-German or anti-French comments (not that they would be acceptable either) even though they, in addition to the US's IMF, are the key players.

I have to say, though, that I did see the piece in Vanity Fair and found it offensive. Not for what it said about the church. But for statements like this about the former Finance Minister who "negotiated" (if that's what obeying troika is) the agreements with the troika:

"He’s open, friendly, fresh-faced, and clean-shaven, and like many people at the top of the new Greek government, he comes across less as Greek than as Anglo—indeed, almost American."

The Greek government currently is hateful and is selling out the country. The writer doesn't seem to notice. And he thinks it's a compliment to call someone American. G-Pap was born in the US and his mother is American. I don't think Greeks will be electing Greek-American PMs for a long time. They might even become probably become birthers.

well i also made the comment that perhaps since the Greek "church" is on the state payroll (and it is) then why not have massive layoffs in the church staffing, in order for them to help out too. But they are not budging on that either. Matter of fact, they want to be exempt from any pain being felt by the Greek street and not only that but they are pushing hard for state allowances in continued hiring of new "priest" Technically speaking the Gpap family are of jewish heritage. Of course they sound Greek and look Greek perhaps, but they themselves are not Greek, to wit therein lies the problem. In any search for truth, one must from time to time concede that certain things you have always held to be true and dear to your heart, are perhaps, not in reality, true. There can be no sacred cows. There can be no personal oxes that cannot be gored. This is my main problem with this dude. Other than that, he is dead nutts right on and the Greeks had better wake up to the problem they have, which is like the problem we all have. Even the head of the Greek Orthodox Church said in late 2010, that the problem with the finances has been brought on by jewish bankers in conjunction with conspiratorial cooperation by the Greek government , while the people slept. Sound familiar? I bet it does.

by the way MS7 here is another comment concerning the land ownership situation by the Greek Orthodox Church. I had made the comment that they are rich beyond anyone's wildest dreams and have all of this land that they have acquired etc and now they are whining because they too will have to start ponying up some cash for expenses. Good grief. Like I am going to expect any Greek court of law to go against these parasites. I brought all of this up because I suspected that the Greek Orthodox Church was complicit in the financial shenanigans that have gone on , and they were. Its all over the internet. This is what happens when the state controls the Church.

Just so you and others, have the full picture…

The Monastery of Vatopaidi was completely vindicated and all charges were dropped.

The Xanthi court decided with decision No. 99100101 / 07.09.2009 and rejected the claim as inadmissible.

In fact the transfers of land to the Government was characterized as BENEFICIAL to the State of Greece because it promoted the common usage of this land and it’s special status as a national natural asset.

The acquired property of the Holy Monastery of the 8,600 acres of Ouranoupoli is either archaeological or forest area and is for all practical purposes a communal property because of the extensive and significant restrictions prescribed by Article 24 of the Constitution of Greece and relevant laws, therefore the land has low value and is practically non usable for commercial purposes and thus has little “business” value.

This decision did thereby NOT void the swaps involving the exchange of properties that were initially presented via the Mass Media as some kind of scandal.

In addition, some of the various journalists who propagated the situation as a scandal, especially those of the Alpha channel, were charged fines, for slander against various people. The fines were, by mandate, given to charities.

The Church in Greece has given more than 95% of it’s property (given to the Church by the many benefactors over the years). That includes land and buildings that are used as Government buildings, Hospitals, etc. etc.

As Said, before, the whole result of this fake “Scandal” was the implication of the then in government politicians even though the evidence was not even circumstantial, but nevertheless changed the popular opinion enough so that the next government was the one that we have now, commuting financial murder, pillage and rape of the whole country.

Euro is dead ... give me a break: Greece, Portugal and Ireland account for less the 5% of Europe GDP (what about California and others ...). This is all about the "Senior bondholders" telling countries that in no way will they accept any sort of shaving ... if someone has to pay it has to be the taxpayer !!!

Bitch, Standards for poors and muddy's all deserve to go to hell (if it exists)

F#@? the debt, f#@? the "free market" and f#@? the rating agencies

Banksters, f#@?ing agencies and gouvermnments: they're all so stupid and greedy that it won't take long before it all comes to an end.

The only question is what happens then: will the market, head currently deep in the sand, scramble upon the confirmation that the ECB emperor is naked, or will it continue acting as if nothing has changed yet again.

Which confirms our initial expectation from a month ago that there is nothing absent a complete loss of ECB credibility that can possibly transpire next, as the ECB realizes there is no way around accepting defaulted Greek bonds as collateral. The only question is what happens then: will the market, head currently deep in the sand, scramble upon the confirmation that the ECB emperor is naked, or will it continue acting as if nothing has changed yet again.

so, what exactly is a "complete loss of ECB credibility" and how would it affect anything at all? the ECB has expressed the same strong view on the subject all along. i think that is credible. they are not, however, ultimately, in control of this situation. if they are forced to do something other than what they would prefer, because it is the best path at that time, i fail to see how that is not credible. to stick to less than optimal plan, just because, would be lacking credibility. either way, they are a central bank. they raise rates; they lower rates; they lend to banks. none of that relies on credibiltiy, despite all the chattering from journos.